Accounting Exam #2

Which of the following is not included in the cost of merchandise inventory?

Freight costs paid by the seller.

A limited liability company (LLC):

Has owners called members.

Which of the following is false pertaining to the voucher system?

It is not necessary if the supplier provides both receiving report and invoice with the merchandise shipped.

Unearned revenues are classified as liabilities.

TRUE

Big Box Store has operated with a 30% average gross profit ratio for a number of years. It had $116,000 in net sales during the second quarter of this year. If it began the quarter with $19,600 of inventory at cost and purchased $73,600 of inventory during the quarter, its estimated ending inventory by the gross profit method is:

$12,000.

A company has net sales of $375,000 and its gross profit is $157,500. Its cost of goods sold is:

$217,500.

A company has net sales of $817,700 and cost of goods sold of $590,700. Its net income is $33,280. The company's gross margin and operating expenses, respectively, are:

$227,000 and $193,720

Zippy had cash inflows from operating activities of $60,500; cash outflows from investing activities of $47,000; and cash inflows from financing activities of $25,000. The net change in cash was:

$38,500

A company has net sales of $695,000 and cost of goods sold of $278,000. Its gross profit equals:

$417,000.

Juniper Company uses a perpetual inventory system and the gross method of accounting for purchases. The company purchased $9,750 of merchandise on August 7 with terms 1/10, n/30. On August 11, it returned $1,500 worth of merchandise. On August 16, it paid the full amount due. The amount of the cash paid on August 16 equals:

$8,167.50.

A company purchased $9,300 of merchandise on June 15 with terms of 3/10, n/45. On June 20, it returned $465 of that merchandise. On June 24, it paid the balance owed for the merchandise taking any discount it was entitled to. The cash paid on June 24 equals:

$8,570

On September 1 of the current year, Scots Company experienced a flood that destroyed the company's entire inventory. Because the company had not completed its month end reporting for August, it must estimate the amount of inventory lost using the gross profit method. At the beginning of August, the company reported beginning inventory of $215,450. Inventory purchased during August was $192,530. Net sales for the month of August were $542,500. Assuming the company's typical gross profit ratio is 40%, estimate the amount of inventory destroyed in the flood.

$82,480

Days' Sales Uncollected Ratio

(accounts receivable/net sales) x 365

The credit terms 2/10, n/30 are interpreted as:

2% cash discount if the amount is paid within 10 days, or the full balance due in 30 days.

Sandoval needs to determine its year-end inventory. The warehouse contains 20,000 units, of which 3,000 were damaged by flood and are not sellable. Another 2,000 units were purchased from Markor Company, FOB shipping point, and are currently in transit. The company also consigns goods and has 4,000 units at a consignee's location. How many units should Sandoval include in its year-end inventory?

23,000

A company's gross profit (or gross margin) was $106,720 and its net sales were $368,000. Its gross margin ratio is:

29% (GP/NS)

A company had net sales of $29,500 and accounts receivable of $4,700 for the current period. Its days' sales uncollected equals: (Use 365 days a year.)

58.15 days.

Beckenworth had cost of goods sold of $9,421 million, ending inventory of $2,089 million, and average inventory of $1,965 million. Its days' sales in inventory equals: (Use 365 days a year.)

80.9 days.

The length of time covered by a set of periodic financial statements, primarily a year for most companies, is referred to as the:

Accounting Period

If a check correctly written and paid by the bank for $749 is incorrectly recorded in the company's books for $794, how should this error be treated on the bank reconciliation?

Add $45 to the book balance.

Closing the temporary accounts at the end of each accounting period does not do which of the following?

Brings the asset and liability accounts to zero balances.

Lower of cost or market:

Can be applied to each individual item, major categories of items, or the whole inventory.

An income statement account that is used to record cash overages and cash shortages arising from petty cash transactions or from errors in making change is titled

Cash Over and Short.

The inventory turnover ratio is calculated as:

Cost of goods sold divided by average inventory.

The understatement of the beginning inventory balance causes:

Cost of goods sold to be understated and net income to be overstated.

At the end of the day, the cash register tape shows $1,000 in cash sales but the count of cash in the register is $1,010. The proper entry to account for this excess is:

Debit Cash $1,010; credit Sales $1,000; credit Cash Over and Short $10.

Havermill Company establishes a $270 petty cash fund on September 1. On September 30, the fund is replenished. The accumulated receipts on that date represent $75 for Office Supplies, $141 for merchandise inventory, and $24 for miscellaneous expenses. The fund has a balance of $30. On October 1, the accountant determines that the fund should be increased by $54. The journal entry to record the establishment of the fund on September 1 is:

Debit Petty Cash $270; credit Cash $270.

The number of days' sales uncollected is used to:

Estimate how much time is likely to pass before the current amount of accounts receivable is received in cash..

A company had a gross profit of $306,000 based on net sales of $403,000. Its cost of goods sold equals $709,000.

FALSE

A company's fiscal year must correspond with the calendar year.

FALSE

A perpetual inventory system is able to directly measure and monitor inventory shrinkage, and thus there is never a need for a physical count of inventory.

FALSE

In a periodic inventory system, cost of goods sold is recorded as each sale occurs.

FALSE

LIFO assumes that inventory costs flow in the order incurred.

FALSE

Recording expenses early overstates current-period income; recording expenses late understates current period income.

FALSE

Specific accounting principles are basic assumptions, concepts, and guidelines for preparing financial statements and arise out of long-used accounting practice.

FALSE

The choice of an inventory costing method has little to no impact on gross profit and cost of sales.

FALSE

The first step in preparing a worksheet is to prepare the income statement.

FALSE

Using the retail inventory method, if the cost-to-retail ratio is 80% and ending inventory at retail is $160,000, then estimated ending inventory at cost is $222,143.

FALSE

When a voucher system is used, an invoice approval is not needed as long as the purchase is evidenced by an invoice and purchase order.

FALSE

A journal entry with a debit to cash of $980, a debit to Sales Discounts of $20, and a credit to Accounts Receivable of $1,000 means that a customer has taken a 10% cash discount for early payment.

FALSE ($20/$1,000 = 2% discount)

The internal document that notifies that ordered goods have been received and describes the quantities and condition of the goods is the:

Receiving report.

A debit to Sales Returns and Allowances and a credit to Accounts Receivable:

Recognizes that a customer returned merchandise and/or received an allowance.

Increases in equity from a company's sales of products or services to customers are:

Revenue

A company had net sales of $340,000, its cost of goods sold was $256,700, and its net income was $13,750. The company's gross margin ratio equals 24.5%.

TRUE

A company with an acid-test ratio of 0.1 is likely to face near-term liquidity problems.

TRUE

A company's cost of goods sold was $15,300 and its average inventory was $4,500. Its inventory turnover equals 3.4.

TRUE

A department manager informs the purchasing department of its needs by preparing and signing a purchase requisition, which lists the merchandise requested to be purchased.

TRUE

A voucher system should be applied to all payments, except those using petty cash.

TRUE

If the Cash Over and Short account has a credit balance at the end of the period, the amount is reported as miscellaneous revenue.

TRUE

The cost of an inventory item includes its invoice cost minus any discount, plus any other costs, such as, shipping, storage, import duties, and insurance.

TRUE

The debt ratio helps to assess a company's risk of failing to pay its debts.

TRUE

The reasoning behind the retail inventory method is that if we can get a good estimate of the cost-to-retail ratio, we can multiply ending inventory at retail by this ratio to estimate ending inventory at cost.

TRUE

A set of procedures and approvals for verifying, approving and recording liabilities for cash payment, and for issuing checks for payment of verified, approved, and recorded liabilities is referred to as a(n):

Voucher system

Average inventory =

beginning inventory + Ending Inventory / 2

Operating Expenses =

gross profit - net income

Gross Profit =

net sales - cost of goods sold